What is Captive Insurance?

Captive insurance is a form of self-insurance where a company creates its own insurance company (known as a captive) to underwrite its own risks. This allows businesses to gain more control over their insurance needs, coverage, and costs, as well as enhance risk management strategies.

Why Would a Business Choose Captive Insurance?

Businesses often choose captive insurance for the following reasons:

• Cost Savings: Captive insurance allows businesses to reduce insurance premiums and retain profits within the company.

• Custom Coverage: Captives can provide coverage tailored specifically to the company's unique risks.

• Stability: Captives offer protection from the volatility of the commercial insurance market, allowing for more predictable costs.

Who Can Benefit from a Captive Insurance Company?

Captive insurance is commonly used by large corporations, but it can also benefit midsize companies and groups with similar risk profiles. Industries with significant risk exposure, such as construction, healthcare, manufacturing, and transportation, often use captives to manage their insurance needs more effectively.

What Are the Different Types of Captive Insurance?

The main types of captive insurance include:

• Single-Parent Captive: Owned by one company to insure its risks.

• Group Captive: Owned by multiple companies to insure the collective risks of the group.

• Association Captive: Formed by members of a common industry or trade association.

• Rent-a-Captive: Allows businesses to "rent" a captive structure without fully owning it.

Are There Tax Benefits to Captive Insurance?

Yes, captive insurance can offer potential tax advantages. Premiums paid to the captive may be tax-deductible as business expenses, and underwriting profits can be deferred. However, tax treatment depends on several factors, including the structure of the captive and the jurisdiction in which it is formed, so consulting with a tax advisor is recommended.

How is Captive Insurance Regulated?

Captive insurance companies are regulated by the jurisdiction in which they are domiciled. Many companies choose to form their captives in well-established domiciles like Bermuda, Vermont, or Cayman Islands, which have favorable regulatory environments. However, several U.S. states also offer regulations for captives.

What Risks Can Be Covered by a Captive Insurance Company?

Captive insurance can cover a wide variety of risks, including:

• Employee Benefits

• General liability

• Workers’ compensation

• Property damage

• Professional liability

• Cyber risks

• Employment practices liability

• Other industry-specific risks

How is a Captive Different from Traditional Insurance?

In traditional insurance, businesses pay premiums to third-party insurers, who bear the risks and generate profits from the difference between claims paid and premiums collected. In a captive, the parent company retains the risk and the profits, giving it more control over the claims process, policy terms, and investment of funds.

What Are the Key Benefits of a Captive Insurance Company?

The primary benefits include:

• Cost Control: Reduced reliance on commercial insurers leads to savings.

• Flexibility: Customizable policies and coverage that meet specific business needs.

• Risk Management: Enhanced focus on risk prevention and mitigation.

• Profit Retention: The company keeps underwriting profits that would otherwise go to commercial insurers.

How Do I Know If Captive Insurance is Right for My Business?

Captive insurance is ideal for businesses with significant or unique risks that may not be effectively covered by traditional insurers. Companies seeking to control their insurance costs, improve risk management, and capture profits from insurance activities should consider a feasibility study to evaluate the benefits of forming a captive.